Journal entries for sales on credit and payment received when a discount is offered:

The sales and the accounts receivable is always for the full amount of the sale.
The cash is the amount actually received (sales x 1 – discount % if discount is taken)
The sales discount amount is: sales $ x discount % offered

The balance sheet for accounts receivable will show:

On the Balance Sheet:It means:

Accounts Receivable Total amount customers owe you
- Allowance for Uncollectible Accounts - Amount you don’t think you will collect

= Net Accounts Receivable = Amount you do think you will collect

The asset reported on the balance sheet, net accounts receivable, must be the amount you
expect to be a future benefit. There is no benefit to an uncollectible accounts receivable.

The accounts that are used to record accounts receivable transactions are:

Sales – represents the amount of goods or services provided

Accounts receivable – represents the amount the customer owes

Allowance for uncollectible accounts – represents the total amount you do not
expect to collect – it is an estimate, you don’t know who won’t pay or how much

Bad debt expense – the current period estimate of what you won’t collect

There are 4 key transactions that must be recorded for accounts receivables:

1) The sale on credit, which creates the accounts receivable

2) The collection of the accounts receivable when a customer pays

3) The estimate of bad debt expense: you don’t know exactly how much won’t be
collected from customers, but you know you won’t collect it all from past history.
You must estimate the expense at the end of the period to match with sales.

4) The write off of an accounts receivable when you know who won’t pay you
and exactly how much won’t be collected. This occurs much later after the sale.

Increases when a sale is made on credit
Decreases when the customer pays
Decreases when an account is written off – you know who won’t pay and amount

Allowance for Uncollectible Accounts:

Increases when estimating bad debt expense using % sales method
Increases or decreases when estimating bad debt expense using % of accounts
receivable (the up or down depends on how much is already in the account)
Decreases when an account is written off

The allowance account represents the total estimate of what won’t be collected.
The company is not sure who won’t pay or exactly how much. When they know
who and how much won’t pay, they take it out of this account and take it off the
accounts receivable list and out of the accounts receivable account.

Bad Debt Expense:

Changes ONLY when you estimate bad debt at the end of the period

If you overestimated in prior periods you can take some expense away when

you are using the % of accounts receivable (aging) method.

The 4 transactions change the accounts:

Accounts Receivable

Beg. Bal

Write-offs

Sales

Collections

___________________

___________________

Amount

customers

owe

Allowance for Uncollectible Accounts

Beginning balance

Write-offs

Estimate of bad

debt expense

___________________

___________________

Amount you do not

expect to collect

Sales

Provide Goods

Bad Debt Expense

Estimate of

bad debt expense

this period

Bad debt expense can be a credit
when using % of A/R (aging) method

Bad Debt Expense: Occurs when you do not get paid for a receivable.

The bad debt expense must be recorded in the same period the sale is made.
(This follows the matching principle: match revenues with all expenses)

Problem: You don’t know how much you won’t collect in the period of the sale.
You won’t know until much later when the customer doesn’t pay.

Solution: You must estimate, (based on past history) the amount you won’t collect
and record this expense in the same period as the sale

There are two ways to estimate the amount of bad debt expense for the current period: % of sales & % of accounts receivable

You are doing a direct match of the bad debt expense to sales. This amount
is also added to the account that accumulates the total amount of accounts
receivable you do not expect to collect (the allowance account).

% of Accounts Receivable (aging method):

Accounts Receivable X % of accounts receivable the company historically does not collect (given)
= The total amount of accounts receivable the company does not
expect to collect

This amount must be the ending balance in the
“allowance for uncollectible accounts account

Make your journal entry for the amount (plug) it takes to get the balance in the
allowance account to be the amount you calculated above.

When you have an aging report which shows how old the accounts are and the % that is
estimated to be uncollectible for each category, you must multiply the balance x the
% given for each category and add them all up to get the total amount you do not
expect to collect. (See Practice As You Learn for an example). When you have the
total, follow the same procedures described above.

The difference between the two methods: % of Sales & % of A/R (aging)

% of Sales: You are calculating the total bad debt expense for the period
You are estimating using this periods sales only

% of A/R: You are calculating a cumulative amount that you do not expect
to collect using the total amount that customers owe you from
this period and all prior periods.
The expense for this period is the change in the cumulative amount
you don’t expect to collect

All material on this web site is copyrighted and the exclusive property of the author. It may not be reproduced or distributed in any form without prior written permission from the author.